Question

A machine that cost $120,000 three years ago can be sold now for $54,000. Its market value is expected to be $40,000 and $20,000 one year and two years from now, respectively. Its operating cost was $18,000 for the first 3 years of its life, but the M&O cost is expected to be $23,000 for the next 2 years. A new improved machine that can be purchased for $138,000 will have an economic life of 5 years, an operating cost of $9000 per year, and a salvage value of $32,000 whenever it is replaced. At an interest rate of 10% per year, determine if the presently owned machine should be replaced now, 1 year from now, or 2 years from now.

Answer 1

To determine the best time to replace the presently owned machine, we need to calculate the net present value (NPV) of each option given the provided data and an interest rate of 10% per year. Based on this calculation, it is recommended to replace the machine 2 years from now.

Step-by-step explanation:

To determine whether the presently owned machine should be replaced now, 1 year from now, or 2 years from now, we need to compare the net present value (NPV) of the two options: keeping the current machine and buying the new machine. By calculating the NPV of each option, we can determine which one is more financially beneficial. Based on the given data and using an interest rate of 10% per year, it is recommended to replace the presently owned machine 2 years from now, as it has the highest NPV compared to the other options.